World Cup Syndrome? Few Yellow Cards in Last Week’s Data.

It’s not surprising that World Cup Syndrome has historically been responsible for lower office productivity around the world – in fact, you may have seen the telling chart created by Bloomberg, which uses European Central Bank (ECB) data to track dips in trading volume during games in the 2010 World Cup.

Perhaps ‘WCS’ is owed a nod for last week’s drop in ISIS (Islamic State) activity? The so-called Group of Death (Syria, Iran, Iraq, and the caliphate formerly known as ISIS) was very quiet last week.

  • ISIS renamed itself the Islamist State and said it was a caliphate.
  • Iraq’s parliament appears frozen, with Sunni, Kurdish, and Shiite factions apparently unable to strike a deal.
  • It appears that the Islamist State gained ground…but oil traders don’t seem worried.

Whether or not those battles playing out on the field in Brazil carried any influence on the global market and economic fronts, we saw a number of positive (and a few negative) trends in data last week . . .

Monthly Jobs Report: Stronger Than Even the Optimists Expected

  • Nonfarm payrolls increased 288k in June and the prior two months were revised up by 29k.
  • The unemployment rate fell to 6.1%.
  • …and it was all employment growth! The labor force participation rate was flat.
  • Average weekly hours were unchanged at 34.5 hours.
  • Average hourly earnings rose 0.2% month over month (m/m), 2.0% year over year (y/y)…on trend.

Forward-Looking Indicators Flashing Green

  • The ISM manufacturing index came in at 55.3; Markit’s final U.S. manufacturing PMI came in at 57.3. The ISM non-manufacturing index came in at 56.0; Markit’s Services PMI came in at 61.0.
  • The Dallas Fed survey showed the Texas economy accelerating.
  • The Chicago-area PMI came in at a solid 62.6

Trailing Data Held up Well

  • Initial unemployment claims remained very low, at 315k.
  • Construction spending was a bit below expectations, but is still up over 5% y/y.
  • Factory orders were a bit below expectations, but nondefense capital goods ex-aircraft (core business investment) was solid.
  • Pending existing home sales were up 6% m/m in May…the y/y change improved from roughly -10% to -5%. All regions showed solid gains; the Northeast led.
  • June auto sales rose to a 17.0 million annual rate, the highest since July 2006.

Energy Production Shrinks the Trade Deficit
The trade deficit narrowed somewhat more than expected in May, with the entire decline attributable to the shrinking petroleum trade deficit. The goods ex-petroleum trade deficit increased a bit, as did the services trade surplus.

Europe Update: Still Muddling Through

  • Eurozone June CPI was up 0.5% y/y…bouncing along at its lows. That’s not great, but it’s far better than continuing declines.
  • Eurozone June manufacturing PMI slipped from 52.2 to 51.8 as Germany faded to 52.0, an 8-month low. Ireland (55.3) and Spain (54.6) were notably strong. Only France (48.2) and Greece (49.4) were below 50. The UK PMI rose from 57.0 to 57.5.
  • The European Central Bank left policy essentially unchanged…no surprise.

Asia Update: A Little Better

  • China’s ‘official’ manufacturing PMI rose from 50.8 to 51.0. The HSBC/Markit manufacturing PMI rose to 50.7 from 49.4…in line with expectations.
  • Japan’s manufacturing PMI rose from 49.9 to 51.5.

Last Week in the Capital Markets
Equities rallied and bond prices fell on news of better global PMIs, lower U.S. unemployment, and lower oil prices.

  • Currencies: The Euro and Yen each declined slightly against the dollar.
  • Bonds: The bond market saw last week’s news as bullish for equities and the economy, but not for bonds. The 10-year U.S. Treasury yield rose 11 basis points (bps) to 2.65%; the 10-year TIP yield rose 10 bps to 0.37%. The BoA Merrill Lynch High Yield Index narrowed 4 bps to 3.44%. Global bond markets were generally quiet.
  • Equities: Equities rallied on better economic data and lower oil prices (lower war risk). The Dow Jones Industrial Average and the S&P 500 Index touched new record highs, with the Dow topping 17,000. The S&P 500 was up 1.2% last week. Other global equity markets were generally up around 1%. Within the S&P 500, there was a dramatic leadership change: Health Care (up 2.0%) led, powered by biotech (up 5% for the week). Utilities (-3.2%) dramatically underperformed every other sector: Energy, next worst, was up 0.5%.
  • Commodities: WTI Oil fell 1.7% to $104.03 on hopes that Libyan exports would resume (with rebels in control of key facilities) and that Iraqi oil production would not be interrupted by the conflict there. Gold was up about $2, its third consecutive up week.

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Data Sources: The Wall Street Journal, Financial Times, Bloomberg.


About Sam Wardwell

Sam Wardwell, CFA, is Senior Vice President and Investment Strategist at Pioneer Investments. He joined Pioneer in 2003.
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